Tuesday, February 21, 2017

No. 205: Hank Greenberg and Howard Smith Settle with the New York Attorney General over Accounting Practices

On February 10, 2017, the office of the New York Attorney General (NYAG) issued a press release about the settlement of civil charges against Maurice ("Hank") Greenberg and Howard Smith, former executives of American International Group (AIG). Eliot Spitzer, the NYAG at the time, filed charges in 2005 over accounting practices relating to transactions that dated back to 2000.

The Departures
In March 2005, amid reports of accounting improprieties in AIG's financial statements, Chief Executive Officer Greenberg and Chief Financial Officer Smith refused to cooperate with investigators, and invoked their Fifth Amendment rights. AIG's board of directors fired Smith and forced Greenberg to resign.

The State Charges
In May 2005, Spitzer, together with Howard Mills, the New York superintendent of insurance at the time, filed civil charges in state court against AIG, Greenberg, and Smith. The complaint addressed eight matters. AIG settled the charges and restated its financial statements. Over the years since, Greenberg and Smith settled most of the state charges.

The recent settlement involved the remaining two charges. One of them involved a sham reinsurance transaction between AIG and General Reinsurance Corporation (Gen Re), a Berkshire Hathaway company. The reinsurance was a sham because it did not transfer risk.

The other remaining charge involved characterizing automobile warranty losses as investment losses rather than underwriting losses. Security analysts pay closer attention to underwriting losses than to investment losses. The recharacterization was accomplished through Capco Reinsurance Company (Capco), a Barbados company.

In July 2005, Greenberg's attorneys prepared an extraordinary memorandum challenging the restatements that AIG had made in its financial statements. The memorandum also discussed Greenberg's role in the transactions that had prompted the restatements.

The Federal Charges
In February 2006, the Securities and Exchange Commission (SEC) filed civil charges against AIG. The firm settled with the SEC, and at the same time settled with the U.S. Department of Justice (DOJ) to avoid the filing of criminal charges. AIG acknowledged that the accounting for the transactions was improper, had already restated its financial statements, and agreed to a global settlement of more than $1.6 billion to settle the state and federal charges.

That same month, the DOJ indicted four individuals—one from AIG and three from Gen Re—involved in the sham reinsurance. In September 2006, the DOJ filed an amended indictment adding another individual from Gen Re. The defendants became known as the "Hartford Five" because the federal jury trial was held in Hartford. The DOJ had powerful evidence in the form of tape recordings; a Gen Re affiliate involved in the transaction was located in Ireland, where it was routine to record telephone conversations. The jury convicted the Hartford Five, but a federal appellate court overturned the ruling on technical legal grounds. The DOJ decided not to retry the case, and entered into non-prosecution agreements under which the defendants paid substantial fines.

In August 2009, the SEC filed civil charges against Greenberg and Smith. They settled the charges the same day. Greenberg and Smith paid $15 million and $1.5 million, respectively, and neither admitted nor denied the allegations.

The Recent Settlement
The bench trial relating to the two remaining state charges against Greenberg and Smith was interrupted while the parties sought to settle the case. Kenneth Feinberg was the mediator. On February 10, 2017, Feinberg issued his recommendations. He referred to an "Agreement" that was "dated November 28, 2016, and subsequently amended." I asked the NYAG's press office for a copy of the agreement, but received no reply. I then asked the NYAG's office for the agreement pursuant to the New York Freedom of Information Law. I do not know when I will receive it.

On February 10, the NYAG announced the settlement in a press release entitled "A.G. Schneiderman Announces Settlement of Martin Act Case Against Former AIG CEO Maurice R. Greenberg and Former AIG CFO Howard I. Smith." The press release includes links to the statements Greenberg and Smith made as part of the settlement. The statements describe their roles in the Gen Re and Capco transactions. For example, Greenberg's statement reads in part:
The Gen Re transaction was done for the purpose of increasing AIG's loss reserves, and the Capco transaction was done for the purpose of converting underwriting losses into investment losses. I knew these facts at the time that I initiated, participated in and approved these two transactions.... I certified AIG's publicly-filed annual consolidated financial statements aware that the financial effects of these transactions were and continued to be reflected in those statements. As a result of these transactions, AIG's publicly-filed consolidated financial statements inaccurately portrayed the accounting, and thus the financial condition and performance for AIG's loss reserves and underwriting income. The accounting for the Gen Re transaction was correctly restated by AIG in AIG's 2005 Restatement.... The accounting for the Capco transaction was also restated by AIG in AIG's 2005 Restatement of the Company's financial results.
Greenberg agreed to pay $9 million (with interest), and Smith agreed to pay $900,000 (with interest). Those amounts were tied to cash bonuses they received in 2001 to 2004.

I mentioned earlier the July 2005 memorandum from Greenberg's attorneys challenging AIG's restatements. Now Greenberg says the "accounting for the Gen Re transaction was correctly restated by AIG."

The Aftermath
The NYAG's press release had three subtitles that included the words "fraudulent," "frauds," and "fraud," and the first sentence of the text included the word "fraud." Many prominent media outlets picked up on those words from the press release. As examples, a headline in The New York Times was "Two Ex-Executives Settle A.I.G. Fraud Case," and a headline in The Wall Street Journal was "Greenberg Settles Civil-Fraud Allegations in AIG Case."

Greenberg was furious, because the words "fraudulent," "frauds," and "fraud" are not in his statement related to the settlement with the NYAG. Greenberg announced a press conference "to set the record straight." Reportedly a member of the media asked Greenberg whether he was going to sue the NYAG, and Greenberg responded that the NYAG has immunity. The headline of a follow-up story in the Times was "Former A.I.G. Chief Tries to Fight the Headlines."

David Boies, Greenberg's attorney, issued a statement. Its final sentence reads: "Nowhere in the agreed statement by Mr. Greenberg is there any reference to any accounting being fraudulent, let alone that Mr. Greenberg was aware of any fraud."

I asked the NYAG's press office to comment on the Boies statement, but received no reply. However, a spokesman for the NYAG reportedly said that Greenberg's admission "speaks for itself: Mr. Greenberg initiated, participated in, and approved two transactions that fundamentally misrepresented AIG's financial performance to shareholders. No number of press conferences or TV interviews by Mr. Greenberg or Mr. Boies is going to change that fact."

Schiff's Writings
David Schiff wrote extensively about AIG and Greenberg in Schiff's Insurance Observer. I asked Schiff for a statement to be included in the package I am offering to readers. He provided a statement in which the final paragraph begins: "But just because he hasn't pled guilty to fraud doesn't mean he's vindicated. He is, at best, a stained legend." Schiff's statement includes a link to his "AIG Chronicles," which consist of 23 articles from 1993 to 2007.

My Writings
I wrote extensively about AIG and Greenberg in The Insurance Forum. My first article about them included in an appendix the full text of the original Spitzer/Miils complaint. Another article included in an appendix the transcripts of the tape recordings of the telephone conversations that the DOJ used in prosecuting the Hartford Five. My articles appeared in eight issues of the Forum from 2005 to 2012.

General Observations
Greenberg, now 91, will never give up. He has never admitted and will never admit he committed fraud, engaged in fraudulent transactions, or was aware of fraudulent transactions. He spent 40 years building AIG into one of the largest insurance companies in the world, and he became one of the most powerful insurance executives in the world. He does not want to be remembered as having committed fraud, engaged in fraudulent transactions, or been aware of fraudulent transactions.

The key problem is that the recent settlement agreement, which I have not yet seen, probably does not contain the language of an agreed-upon joint statement that the parties could have used in announcing the settlement. That is an important lesson to be learned from the events that occurred in the wake of the recent settlement.

Available Material
I am offering a complimentary 63-page PDF consisting of the Feinberg recommendations (1 page), the NYAG press release (2 pages), the Greenberg statement (1 page), the Smith statement (1 page), the Boies statement (2 pages), the Schiff statement (2 pages), and articles from eight issues of the Forum (54 pages). Email jmbelth@gmail.com and ask for the February 2017 package relating to the settlement of the NYAG case against Greenberg and Smith.


Tuesday, February 14, 2017

No. 204: President Donald Trump's Outrageous Two-for-One Executive Order Faces a Powerful Legal Attack

On February 8, 2017, Public Citizen and two other plaintiffs filed a powerful lawsuit against President Donald Trump, the United States of America, and many other defendants. The plaintiffs seek to prevent implementation of an outrageous presidential executive order directing federal agencies to rescind two regulations for every new regulation proposed or issued. The case was assigned to Senior U.S. District Judge Gladys Kessler, a 1994 President Clinton nominee who took senior status in 2007. (See Public Citizen v. Trump, U.S. District Court, District of Columbia, Case No. 1:17-cv-253.)

Public Citizen is a national, nonprofit consumer advocacy organization with more than 400,000 members and supporters nationwide. It engages in research, advocacy, media activity, and litigation related to advancing health and safety, consumer protection, and the environment, among other things.

Natural Resources Defense Council is another plaintiff. It is a nonprofit environmental and public health organization with hundreds of thousands of members nationwide.

Communications Workers of America, part of the AFL-CIO, is another plaintiff. It is a labor union representing 700,000 workers in the telecommunications, media, manufacturing, airline, and health care industries and in a wide variety of public sector positions in the U.S., Canada, and Puerto Rico.

President Trump and the U.S.A. are defendants. The other defendants are top officials of the Office of Management and Budget (OMB), the Department of Energy, the Department of Transportation, the National Highway Traffic Safety Administration, the Department of Labor, the Department of the Interior, the Federal Motor Carrier Safety Administration, the Fish and Wildlife Service, the Environmental Protection Agency, the Pipeline and Hazardous Materials Safety Administration, the National Marine Fisheries Service, the Mine Safety and Health Administration, and the Federal Railroad Administration.

The Complaint
Four paragraphs in the ten-paragraph introductory section of the complaint summarize the case. They read:
1. This action seeks declaratory and injunctive relief with respect to an Executive Order on "Reducing Regulation and Controlling Regulatory Costs" issued by President Donald Trump on January 30, 2017, and Interim Guidance issued by the Office of Management and Budget (OMB) on February 2, 2017, regarding implementation of the Executive Order. The Executive Order exceeds President Trump's constitutional authority, violates his duty under the Take Care Clause of the Constitution, and directs federal agencies to engage in unlawful actions that will harm countless Americans, including plaintiffs' members.
2. The January 30, 2017, Executive Order states, among other things, that an agency may issue a new regulation only if it rescinds at least two existing regulations in order to offset the costs of the new regulation. It directs agencies, among other things, (1) to identify at least two existing regulations to repeal for every new regulation proposed or issued, and (2) to promulgate regulations during fiscal year 2017 that, together with repealed regulations, have combined incremental costs of $0 or less, regardless of the benefits. The total incremental cost limit for future fiscal years is to be identified later by the Director of OMB.
3. The Executive Order will block or force the repeal of regulations needed to protect health, safety, and the environment, across a broad range of topics—from automobile safety, to occupational health, to air pollution, to endangered species.
10. The Executive Order is unlawful on its face. Implementation and enforcement of the Executive Order should be enjoined.
Illustrations in the Complaint
The complaint illustrates the kinds of regulations the executive order encompasses, but they are only a few examples of the regulations to be affected. The complaint identifies regulations issued pursuant to several statutes: the Motor Vehicle Safety Act, the Motor Carrier Safety Act, the Occupational Safety and Health Act, the Mine Safety and Health Act, the Toxic Substance Control Act, the Hazardous Materials Transportation Act, the Federal Railroad Safety Act, the Federal Water Pollution Control Act, the Energy Policy and Conservation Act, the Endangered Species Act, and the Clean Air Act.

Causes of Action
The complaint contains five causes of action. They are: (1) the executive order violates the separation of powers, (2) the executive order violates the Constitution's Take Care Clause, (3) because the executive order directs agencies to violate the law, the executive order is of no force and effect, (4) because the executive order directs agencies to violate the law, the OMB interim guidance implementing the executive order and the executive order are of no force and effect, and (5) because the executive order directs unlawful action, its implementation by the director of the OMB will cause other federal agencies to violate the Administrative Procedure Act and is of no force and effect.

The plaintiffs ask the court to do five things. They are: (1) declare that the executive order violates the Constitution's Take Care Clause, exceeds presidential authority under the Constitution's Article II, infringes on legislative authority, and is invalid; (2) declare that the defendants cannot lawfully implement or comply with sections 2, 3(a), and 3(d) of the executive order; (3) declare unlawful and set aside the OMB interim guidance; (4) enjoin the agency defendants, including the director of the OMB, from complying with the executive order; and (5) grant such other relief as the court may deem just and proper.

General Observations
I think Public Citizen's complaint against President Trump is a powerful legal attack against an outrageous two-for-one executive order. Because the executive order focuses on regulatory costs and says nothing about regulatory benefits, I think issuance of the executive order is an act of treachery that is contrary to the health and welfare of humanity.

Public Citizen's complaint has not yet received the broad publicity it deserves, in contrast to the massive public attention to the outrageous executive order relating to immigrants and refugees. It will be important to watch the progress of Public Citizen v. Trump.

Disclosure Note
Public Citizen Litigation Group (PCLG), a unit of Public Citizen, played a major role in drafting the complaint discussed here. PCLG has represented me on several occasions, most notably in my successful lawsuit against the North Carolina Department of Insurance. The Department had sought to ban distribution in North Carolina of the April 1981 issue of The Insurance Forum. That four-page issue was devoted in its entirety to the first of my many articles about the A. L. Williams organization.

Available Material
I am offering a complimentary 61-page PDF consisting of Public Citizen's complaint (49 pages), the two-for-one executive order (4 pages), and OMB's interim guidance (8 pages). Email jmbelth@gmail.com and ask for the February 2017 package relating to Public Citizen v. Trump.


Monday, February 13, 2017

No. 203: Long-Term Care Insurance Premium Increase Requests Approved by the Massachusetts Division of Insurance

On January 20, 2017, the Massachusetts Division of Insurance (DOI) issued a press release announcing its approval of long-term care (LTC) insurance premium increases requested by 16 LTC insurance companies. In some cases, the increases pertain to blocks of business in runoff; that is, where companies are not issuing new LTC insurance policies. In virtually every case, the increases are significantly smaller than the increases requested by the companies, and in most cases the increases are spread over a few years. Here are the companies:
American General Life Ins Co
Bankers Life & Casualty Co
Berkshire Life Ins Co of America
CMFG Life Ins Co
John Hancock Life Ins Co
Lincoln National Life Ins Co
MetLife Ins Co of Connecticut
Metropolitan Life Ins Co
Mutual of Omaha Ins Co
New York Life Ins Co
Provident Life & Accident Ins Co
RiverSource Life Ins Co
Time Ins Co
Union Security Ins Co
United of Omaha Life Ins Co
Unum Life Ins Co of America
Missing from the list are Genworth Life Insurance Company and Northwestern Long Term Care Insurance Company, two prominent companies that are still issuing LTC insurance policies. Genworth is a special case, which I discuss later. I asked Northwestern to comment on its omission from the list. A spokeswoman said the company has not filed an LTC insurance premium increase request in Massachusetts but plans to do so in the near future.

Nature of the Increases
Among the 16 companies, the original filing dates of the premium increase requests are from June 2012 to January 2016. The requested increases range from 0 to 303 percent, with most of the requests in the range of 30 to 60 percent. Most of the increases approved by the DOI range from 20 to 40 percent, in most instances to be spread over two to four years. The increases relate to about 55,000 Massachusetts policyholders. Details are in a spreadsheet DOI provided.

The Genworth Statement
I asked Genworth to comment on its omission from the list. A spokeswoman provided this statement:
The Division of Insurance has not taken action on Genworth's filings which have been pending for years. Massachusetts lags behind virtually every other state in taking timely action in response to rate increase filings and in granting necessary rate increases, which are vital to ensuring that Genworth is able to meet its policyholder obligations in the future. Genworth participated in a lengthy dialogue with the Division over the company's rate increase filings, which were first filed in 2012, but ultimately was not able to reach a negotiated settlement with the Division, and the Division took no action on Genworth's long pending rate filings. If other states took the same approach as Massachusetts, solvency issues would arise. Massachusetts' unwillingness to take timely action on actuarially justified rate increases, as virtually every other state has done, in effect means that Genworth policyholders in other states are subsidizing policyholders in Massachusetts. Accordingly, Genworth has been constrained to file a lawsuit against the Division to resolve these issues. Genworth does not comment on pending litigation.
The Genworth Lawsuit
On January 9, 2017, Genworth filed a lawsuit in state court against the Massachusetts Commissioner of Insurance. Genworth seeks a declaratory judgment and injunctive relief. The complaint describes in detail the developments over the past four years relating to Genworth and the DOI. Here I attempt to summarize the developments briefly.

In December 2012, Genworth filed requests for premium increases, and provided actuarial justification. The requested increases ranged from 35 to 134 percent. Within a month, the DOI, without indicating any actuarial or legal basis, said it would review the request only if Genworth amended its filing to impose a 10 percent limit on the increases.

In May 2013, Genworth reduced its requested increase to 10 percent. The DOI did not respond for several months. In September 2013, the DOI asked for additional information, which Genworth provided. In October 2013, the DOI asked for more additional information, which Genworth provided. In December 2013, the DOI said it closed the file with the assertion that Genworth had not provided the requested information. However, the DOI reopened the file after Genworth protested. On January 21, 2014, the Boston Globe reported that the DOI was putting all pending requests for LTC insurance premium increases on indefinite hold pending the issuance of regulations. The DOI has not issued regulations.

Over the years, Genworth sought, without success, to have the DOI approve the request or, in the alternative, disapprove the request so that the company could appeal the disapproval through administrative and/or court proceedings. Six in-person meetings in Boston between DOI officials and Genworth executives took place during 2015 and 2016. In a July 2016 meeting, the DOI suggested that Genworth invoke a "deemer" provision of Massachusetts law allowing the company to consider that the requests were deemed approved when the requests were not acted upon, and to implement the increases. In October 2016, Genworth informed the DOI that the company would invoke the deemer provision within 30 days.

Yet negotiations continued, with the DOI finally offering to approve 10 percent increases for each of the next four years. Genworth rejected the offer. In December 2016, a DOI attorney said the deemer provision did not apply. Genworth then filed its lawsuit. (See Genworth v. Judson, Superior Court, Suffolk County, Massachusetts, Case No. BLS 17-0073.)

General Observations
Insurance regulators face a dilemma in dealing with requests to approve large increases in LTC insurance premiums. On the one hand, when they disapprove, or approve smaller increases, they threaten the solvency of the insurance companies. On the other hand, when they approve large increases, they impose a heavy burden on LTC insurance policyholders, many of whom are elderly and have difficulty handling the increases. In the latter situation, allowing policyholders to avoid the increases by reducing the benefits imposes a different but still potentially heavy burden on the policyholders. The dilemma notwithstanding, I think it is unconscionable for a regulator to drag its feet for years after receiving a request for an increase in LTC insurance premiums.

Available Material
I am offering a complimentary 31-page PDF consisting of the DOI press release and spreadsheet (2 pages) and the Genworth complaint (29 pages).  Email jmbelth@gmail.com and ask for the February 2017 package relating to the Massachusetts DOI's handling of requests for LTC insurance premium increases.


Monday, February 6, 2017

No. 202: Nationwide's Cost-of-Insurance Increases and a Lawsuit with an Extra Dimension

On July 8, 2016, two plaintiffs filed a lawsuit against Nationwide Life Insurance Company about cost-of-insurance (COI) increases on two variable universal life insurance policies. The lawsuit has an extra dimension, described below, which transforms the case into a strange one. (See Palumbo v. Nationwide, U.S. District Court, District of Connecticut, Case No. 3:16-cv-1143.)

The case was assigned to Senior U.S. District Judge Warren W. Eginton. President Carter nominated him in June 1979, the Senate confirmed him the following month, and he assumed senior status in August 1992.

Developments in the Lawsuit
On August 31, 2016, Nationwide filed a motion to dismiss the first seven of the ten claims in the complaint. On December 15, for a reason explained later, the plaintiffs filed an amended complaint. On December 29, Judge Eginton filed a stipulation and order regarding Nationwide's responses to the amended complaint. On January 9, 2017, after briefing by both sides, the judge denied Nationwide's motion to dismiss the first seven claims in the complaint. On January 23, Nationwide filed an answer to the amended complaint.

The Parties in the Original Complaint
One plaintiff is Laura L. Palumbo (Laura), a Connecticut resident. She is the trustee of an irrevocable insurance trust created in 1994. The other plaintiff is William J. Palumbo (William). He is the grantor of the trust and the insured in the two policies the trust owns. He was a Connecticut resident when the policies were issued, and is now a Florida resident. Laura is William's daughter. The sole defendant in the original complaint is Nationwide Life. As explained later, there is a nominal additional defendant in the amended complaint.

The Policies
Both policies are variable universal life, and each has a $500,000 death benefit. One was issued in November 1994, and the other in November 1996. Both were issued by Provident Mutual Life Insurance Company, which demutualized in 2002 under the sponsorship of Nationwide Corporation and became part of the Nationwide organization. The policies are now Nationwide Life policies.

The plaintiffs did not attach copies of the policies as exhibits to the complaint. However, Nationwide attached copies of the policies as exhibits to its motion to dismiss the first seven claims in the complaint. Nationwide did not include copies of the applications for the policies.

William was 57 when Provident issued the first policy in November 1994, so he was 79 in November 2016. In the first policy, the initial planned annual premium was $9,800.

A policy's "net amount at risk" is the death benefit minus the account value. In the first policy, the guaranteed (maximum allowable) monthly COI rates per $1,000 of the net amount at risk rose from 79 cents at age 57 to $7.14 at age 79. The mortality charge for a month is the monthly COI rate multiplied by the net amount at risk in thousands. The increasing guaranteed COI rates result from the insured's increasing age. I was not able to deduce the actual COI rates used by the company in calculating the monthly mortality charges imposed on the policyholder.

The plaintiffs said they obtained updated illustrations in September 2014 and were shocked to learn that the account values of the policies had declined sharply. They said they were also shocked to learn that in the first policy, for example, the new planned annual premium—about $29,000 compared to the $9,800 initial planned annual premium—made the policies unaffordable. The plaintiffs said that, when Laura wrote to Nationwide asking how the monthly mortality charges were calculated, the company's compliance office said it was "unable to get that question answered."

The Extra Dimension
Laura has long been a registered representative authorized to sell securities such as variable life, and she was involved in the sale of the policies to the trust. In its motion to dismiss the first seven claims, Nationwide put it this way: "In other words, Ms. Palumbo sold the Policies to herself in her capacity as Trustee of the Palumbo Trust."

On April 3, 2015, Laura wrote to Nationwide alleging that the company had made misrepresentations and omissions relating to the COI charges. She made clear in the letter that it was a complaint against Nationwide, rather than a complaint against herself because of her involvement in the sale of the policies.

On May 18, 2015, Nationwide Securities, LLC filed a U5 with the Financial Industry Regulatory Authority, Inc. (FINRA) stating that a written complaint had been made against Laura by the Palumbo Trust alleging misrepresentations and omissions in the sale of a variable life insurance policy. The U5 is the uniform termination notice that is used in securities industry registration.

On May 22, 2015, Nationwide wrote to Laura informing her of the U5. She contacted FINRA disputing the U5. FINRA said it would provide Nationwide with "some guidance." In January 2017, I looked at the BrokerCheck report about Laura (CRD #1262003) on FINRA's website. I found no mention of the U5 or any other "disclosure event."

The Allegations
The plaintiffs allege that Nationwide made misrepresentations and omissions of material facts to the plaintiffs regarding the COI charges in the two policies. The first seven of the ten claims in the complaint are fraud, violation of the Connecticut Unfair Trade Practices Act, violation of the Connecticut Unfair Insurance Practices Act, breach of contract, breach of the implied covenant of good faith and fair dealing, a request for declaratory relief, and unjust enrichment.

The Amended Complaint
On December 1, 2016, Judge Eginton ordered the plaintiffs to file an amended complaint adding FINRA as a nominal defendant. On December 15, the plaintiffs filed the amended complaint. It is the same as the original complaint except for the addition of FINRA as a nominal defendant.

The final three of the ten claims in both complaints are for defamation, intentional infliction of emotional distress, and injunctive relief. They relate only to Laura. They grew out of the U5 filing, which is discussed in the "extra dimension" section above.

In the amended complaint, the plaintiffs make clear that FINRA is not accused of wrongdoing and is added as a nominal defendant only to facilitate relief with respect to the final three claims, which are asserted by Laura individually. She requests that "a false, defamatory, and malicious" U5 filed against her by Nationwide Securities be expunged. Because there is no mention of the U5 or any other "disclosure event" in the current FINRA report on Laura, it appears that the U5 has been expunged.

In its motion to dismiss the first seven claims, Nationwide says the parties are discussing the possibility of an amicable resolution of the final three claims, that those claims pertain only to Laura, and that Nationwide reserves the right to compel arbitration with respect to those three claims. I do not know what if anything Laura's contract with Nationwide says about arbitration.

General Observations
Usually the focus in a COI case is on the question of whether the actual mortality charges imposed upon the policyholder are implemented in a manner consistent with the precise language of the policy. In this case, I have not yet been able to deduce the answer to that question.

In its motion to dismiss the first seven claims, Nationwide attached not only the policies but also some, but not all, of the quarterly statements sent to Laura in her capacity as trustee of the trust. The statements show beginning account values and ending account values. If the plaintiffs had reviewed the statements, it should have come as no surprise that the account values had declined significantly.

An important question is whether Nationwide should have routinely provided each year, without a request from Laura, updated illustrations showing the future planned annual premiums needed to prevent substantial erosion of the account values. A company may say it has no contractual or other legal obligation to provide updated illustrations. However, I think a company should provide updated illustrations at least once a year in order to reduce the likelihood of policyholder disappointment.

As indicated at the outset, the "extra dimension" made this a strange case and was a factor in my decision to report on it. I had never heard of a case in which a U5 was filed against the very person who submitted a complaint to the company.

I think the parties will resolve amicably the final three claims in the original complaint and the amended complaint relating to the U5. Further, although the complaints survived the motion to dismiss, I think the parties will settle the first seven claims quietly. I say "quietly" because this is not a class action lawsuit (at least not yet) and any settlement agreement probably will be cloaked in confidentiality.

Available Material
I am offering a complimentary 10-page PDF consisting of Judge Eginton's December 29 stipulation and order (4 pages), and his January 9 decision on Nationwide's motion to dismiss the first seven claims (6 pages). Email jmbelth@gmail.com and ask for the February 2017 package relating to the Palumbo/Nationwide case.


Thursday, February 2, 2017

No. 201: Donald Trump and the Constitutional Crisis of 2017

Donald Trump, on the campaign trail, repeatedly promised to shake things up. In the process of honoring that promise, he has plunged our nation into a grave constitutional crisis.

The Executive Order and the Lawsuit
On Friday, January 27, one week after his inauguration, President Trump signed an executive order relating to immigrants and refugees. The next day, the American Civil Liberties Union (ACLU) and others filed a class action lawsuit against Trump seeking an emergency stay to block implementation of the executive order. There have been other similar cases filed in federal courts around the country. (See Darweesh v. Trump, U.S. District Court, Eastern District of New York, Case No. 1:17-cv-480.)

The Hearing
The case was assigned initially to U.S. District Judge Ann M. Donnelly. President Obama nominated her in December 2014. The Senate confirmed her in October 2015.

On Saturday night, January 28, Judge Donnelly held a short hearing. In attendance, in addition to ACLU attorneys, was U.S. Attorney Robert Capers of the Eastern District of New York, but he did not participate. That task was assigned to Assistant U.S. Attorney Susan Riley. Also participating, by telephone, was Gisele Westwater of the Office of Immigration Litigation in the U.S. Department of Justice.

By the time the hearing began, the two named plaintiffs in the class action lawsuit had been released from detention. After the introductions, the following exchange occurred:
THE COURT: So both have been released. Let me just ask you, are you opposing the application for a stay?
MS. RILEY: Well, we believe it's moot, your Honor. Both of the named plaintiffs have been released and there is no need for the issuance of a stay.
THE COURT: What about all the other people in the class? Just because, I just want to be clear that I have the class members here. The petitioners are asking for certification of a class that consists of all individuals with refugee applications, approved by U.S. Citizenship and Immigration Services, as part of the U.S. Refugee Admissions Program, holders of valid immigrant and non-immigrant visas, and other individuals from Iraq, Syria, Iran, Sudan, Libya, Somalia, and Yemen legally authorized to enter the United States but who have been or will be denied entry to the United States on the basis of the January 27, 2017 executive order. So, I am assuming that there are going to be more people that this executive order has an impact on, is that correct?
MS. RILEY: Yes, your Honor.
Subsequent Developments
Judge Donnelly issued the stay immediately after the hearing. Shortly thereafter, the case was reassigned to Senior U.S. District Judge Carol Bagley Amon. President George H. W. Bush nominated her in May 1990 and the Senate confirmed her in August 1990. She served as Chief Judge from 2011 to 2016. She assumed senior status in November 2016.

On Monday, January 30, Acting U.S. Attorney General Sally Yates circulated a letter instructing the Department of Justice not to defend the constitutionality of the executive order. That night, Trump fired her. I do not know what impact, if any, the firing of Yates will have on the confirmation process for U.S. Senator Jeff Sessions, who Trump has nominated to be the U.S. Attorney General.

Trump replaced Yates with Dana Boente, the U.S. Attorney for the Eastern District of Virginia. Reportedly he has already instructed the Department of Justice to defend the constitutionality of the executive order, although there can be no assurance the Department will be successful in its defense of the executive order.

The "Saturday Night Massacre"
Many believe that the "Saturday Night Massacre" on October 20, 1973 was the gravest constitutional threat since the Civil War. President Richard Nixon had ordered U.S. Attorney General Elliot Richardson to fire Watergate Special Prosecutor Archibald Cox and shut down Cox's office. Instead of carrying out the order, Richardson resigned. Nixon then ordered Deputy U.S. Attorney General William Ruckelshaus to fire Cox and shut down Cox's office. Ruckelshaus refused to carry out the order, and Nixon fired him. Nixon then ordered Solicitor General Robert Bork to fire Cox and shut down Cox's office, and Bork complied with the order. Cox's reported comment at the time was succinct: "Whether we shall continue to be a government of laws and not of men is now for Congress and ultimately the American people [to decide]."

Articles of Impeachment
Immediately after the events of October 20, 1973, members of the U.S. House of Representatives began discussing the possibility of introducing articles of impeachment. Nixon later was impeached by the House, but he resigned before the vote in the Senate trial. Subsequently President Gerald Ford pardoned him.

The events of the last few days have escalated into the gravest constitutional threat to our nation since that frightening weekend in 1973. I consider it likely that articles of impeachment directed at Trump are now a topic of private discussions in the U.S. House of Representatives.

Available Material
I am offering a complimentary 23-page PDF containing the transcript of the hearing conducted by Judge Donnelly. Email jmbelth@gmail.com and ask for the transcript of the January 28 hearing in the Darweesh/Trump case.